UPDATE 2-Argentine bonds up after US ruling quells default fears

November 29, 2012|Reuters

* Bond prices surge as fears of imminent default retreat

* Emergency stay order gives Argentina breathing space

By Jorge Otaola and Walter Bianchi

BUENOS AIRES, Nov 29 (Reuters) - Argentine bond pricesrallied on Thursday after fears of an imminent debt defaultreceded when a U.S. appeals court gave the country a reprieve ina legal battle with holdout creditors.

The 2nd U.S. Circuit Court of Appeals' decision on Wednesdayto grant an emergency stay order gives Argentina more time tofight a ruling favoring "holdout" investors who rejected tworestructurings of defaulted bonds and seek full repayment in thecourts.

This delays a ruling on whether Argentina will have to pay$1.33 billion to the holdouts until late February at theearliest, quelling investor fears of a default next month whensome $3.3 billion in payments come due on restructured debt.

"It's very positive because (the U.S. court) has pushed outthe stay order until March and that means the government getsmore time to see what it can do," said Kevin Daly, a portfoliomanager at Aberdeen Asset Management in London.

Last week, U.S. District Judge Thomas Griesa orderedArgentina to deposit $1.33 billion by Dec. 15 to pay a group ofholdouts, led by NML Capital Ltd and Aurelius Capital Managementfunds.

On the same day, about $3 billion comes due on thegrowth-linked GDP warrants, issued during the 2005 and 2010 debtswaps.

The ruling was a blow against Argentina's combative,left-leaning President Cristina Fernandez, who calls the holdoutfunds "vultures" and has vowed never to pay them.

It also raised fears of a default because, if Argentina hadrefused to pay the holdouts as expected, U.S. courts could havedisrupted payments to the holders of restructured bonds.

Wednesday's appeals court postpones that possibility.

"The risk of the stay being lifted again in the near termseems low, in our view. We expect the stay to remain in placeuntil the appeals court reaches its decision," investment bankCredit Suisse wrote in a briefing note.

"It is almost impossible to predict how long it will takethe appeals court ultimately to rule on the appeal following thearguments."

According to Markit's credit default swap data, the cost toinsure $10 million worth of Argentine debt, annually for fiveyears, fell by a third in one day to $2.077 million on Thursdayfrom $3.090 million on Wednesday.

Griesa ruled earlier this year that Argentina violated the"pari passu" bond provision requiring it treat all creditorsequally when it paid the exchange bondholders without paying theholdouts. He said they should all be paid simultaneously.

His decision was largely upheld in a surprise ruling by the2nd Circuit last month. Argentina has appealed and, separately,the 2nd Circuit still has to review some aspects of Griesa's payment order that it found confusing.

Argentina has said it will take its case to the U.S. SupremeCourt if necessary.

"The attention refocuses back on the appeal process andwhether Argentina can effectively seek an extended legal processthat would allow them to build momentum to overturn the paripassu judgment," wrote Siobhan Morden, head of Latin Americastrategy at U.S. investment bank Jefferies & Co.